Building Business Relationships in China

Now that we’ve covered the update on the FCPA and corruption in China and you know that the wrong gift could have legal repercussions, let’s talk about Guanxi and how gift giving can help or hurt your business strategy in China.

Guanxi – Your Personal Business Network

Guanxi broadly defined is your business network; however, this network is much more important and has stricter rules than in the United States. Remember that in China, all business is personal. The line between a professional and personal relationship is blurred in Chinese culture. They are simply relationships.

Andrew Hubert, in his book “Guanxi for the Busy American,” describes Guanxi as a favor network. In its truest form, Guanxi is not corruption but rather a cooperative effort to make business and life work. Harmony plays an important role in Chinese culture. Everyone must work together and play fair. Managing relationships so that there is harmony between all parties is important.

Chinese people are very careful about favors and gifts. They don’t want to be in your debt at the wrong time. At one point, Chinese people carried around notebooks to track favors and be sure that every favor was repaid appropriately. A key point in Hubert’s book is managing the favors you owe before you are forced to return the favor in a manner not to your benefit. You would be smart to manage your own debts and favors carefully when in China. The alternative is to refuse to repay a favor, which will end the relationship.

Don’t Give the Wrong Gift

In the United States, we say, “It’s the thought that counts” when someone gives us the wrong gift. We appreciate that they took the time to go out and get a gift. In China, the thought counts less than your judgement. It certainly does not cover up a mistake. You might be okay if you simply give a mediocre gift, but it will be serious if you insult someone.

Each culture has rules about giving gifts. Chinese culture is specific about numbers, colors, certain gifts (often related to how the words sound.)

It is Your Judgement as Much as the Gift

Any gift you give should be the right value. The right value respects the state of the relationship and your relative social standing. You must display good judgement in this and many other areas to be successful in doing business in China.

A gift that is too expensive creates an obligation for the person receiving it. They will not want to be in your debt and will go out and buy a gift of similar or better quality. If this continues to happen, they may resent the obligation and begin to avoid you. A gift that is too cheap for the relationship or their social status will cause both of you to lose face. They will lose face because you disrespected them. Make a mistake in either direction and you will likely lose face for poor judgement.

Gifts, Guanxi and Corruption in China

Corruption in China has been prominent in the news over the past few months. If you do business in China, you should be aware of recent events. China’s new leadership is cracking down on corruption. The US started cracking down on corruption back in 2010 with a special enforcement unit. The US government also initiated a number of enforcement actions in 2012.

With all of the above happening, we are declaring January “Corruption Month.”  We will publish an article on gift giving and corruption in China every Thursday in January.

If you are American you should be aware of the Foreign Corrupt Practices Act (FCPA). If you need more background on the FCPA, I wrote about the FCPA earlier in 2012. There are also a lot of good reference sites. If you need an actual legal opinion, I suggest you contact a real lawyer who practices in this area.

Corruption in China – Is it really that bad?

One recent study says corruption in China is not that bad at least not when you compare it to per-capita income. The study compared the level of corruption to the per-capita income in both the US and China. The study found that corruption in the US was higher than in China if you compare times when per-capita income was the same. This means comparing modern day China to the United States in 1870. At that time, China actually had less corruption relative to per-capita income. The study concluded that there may be a life cycle of corruption that involves less corruption as societies and countries mature. I guess the US was a teenager in 1870.

On the other hand China was rated at 39 on a scale of 100 (0 being highest level of corruption) and ranked 80th out of  174 countries. China reportedly believes that the level of corruption threatens the communist party’s ability to stay in power. If this is really the case (and I believe it is), then you can expect changes in how corruption is enforced. For more information on corruption in China, please check out the Business Anti Corruption Portal website on China.

From my perspective, corruption is an enormous problem in China. Political and Military positions are bought and sold for enormous sums and the new office holder recovers the cost by demanding gifts and bribes from underlings. In this fascinating article, Li, a small business woman in Jinan, details how for mid-autumn festival she gave about “$800 to each official she needs to keep happy.” She goes on to explain that the officials track who gives the best gifts. She implied that if she falls below others, it will impact her ability to do business.

There is corruption in every country. Without creating an independent investigative, judicial and enforcement process, there is little hope that the government can stem the tide of corruption that threatens to swamp the entire country. Add the culture of giving gifts and trading favors and you have an extremely slippery slope. When does a favor or gift become corruption? The easy answer is when it is a direct trade for something else.

The War on Corruption in China

The War Corruption in China has been all over the news with the recent leadership change in China. Steve Barru (@sbarruchinahand) also argues that this latest anti-corruption campaign in China will ensnare more higher level officials. Mr. Barru also believes that the campaign will not address the systemic drivers for corruption, which are the lack of checks and balances in government.

Corruption may threaten China as a whole or just “the party.” the question is can China survive the burden of the cost of corruption. Weibo and the internet may be China’s biggest hope against corruption. Time details why expensive watches are no longer in vogue with chinese officials in the article “Bringing Down Watch Brother.” The articles describes how  a picture of  an official wearing an expensive watch smiling at the scene of a grisly car accident went viral on Weibo. The official was eventually removed from office.

What Now?

Over the next month, we’ll be detailing how to articles on the culture of giving gifts, trading favors and corruption in China. I hope you enjoy the posts.

What Weddings Teach You About Business in China

If you want to do business in China, you must understand face, developing relationships and guanxi.

Business at a Nice Dinner

In some ways a wedding is a business transaction. Weddings can teach you how to build relationships, develop guanxi and give face. The family invites other family members, friends and close business contacts. Sometimes the couple is giving face by inviting someone. At other times, the couple will thank someone important for giving them face by showing up. Learning to read between the lines at the wedding hall will help you read between the lines in the boardroom.

The main part of the ceremony is a meal. Meals are an important part of doing business in China. A good friend, Geoff O’Keeffe, believes that people must leave their “food ninniness at the door.” I agree. Let it all go and enjoy the experience. Doing this alone will help you build relationships in China.

On a side note: different foods have different meanings.

If you look around, you will notice that the more important people are sitting closer to the bride and groom or at better tables. Hierarchy is important in China and you should at least understand why people are sitting in certain spots. The family will be closest and at the best spots. Friends and old classmates will come next. The further out the less important you are. This is similar to how it is done in business, so study and learn.

The Gift is Money (but is it really a gift?)

Instead of a gift, each person brings a red envelop with money. Give more money for closer relatives and friends. The number must be even but should not include any fours. Give the red envelop to someone at the table where you sign in. They will write your name and the amount you gave in a register. Later they will create a list of each person and the amount they gave. This list will be used at future weddings. One day, you will invite the bride and groom to your wedding (or your child’s). They will bring a red envelop with more money than you gave them. Guanxi functions in a similar manner. If someone does a favor for you, you should be prepared to pay them back. Break this unspoken rule and risk losing the relationship. Follow this rule for long enough and you might even develop some guanxi (as much as a foreigner can anyways).

Have you ever attended a Chinese wedding? What was your experience?